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Pre-Formatted Slides Building Tomorrow Research Template BUILDING TOMORROW™ Macro Credit Research Bloomberg Coco Bond Symposium, Coconomics March 2015 Alberto Gallo, CFA Head of European Europe’s old banking system and its new capital Macro Credit Research +44 (0) 20 7085 5736 [email protected] Lee Tyrrell-Hendry Macro Credit Analyst +44 (0) 20 7085 9462 [email protected] Mateja Popovic Macro Credit Analyst +44 (0) 20 7085 9698 [email protected] Tao Pan Macro Credit Analyst +44 (0) 20 7678 3122 [email protected] Ashleigh Grant Macro Credit Analyst +44 (0) 20 7678 6494 [email protected] Gaurav Chhapia Apurv Chaudhari Produced by The Royal Bank of Scotland plc. In the UK, the Royal Bank of Scotland plc is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct rbs.com/cib Authority and the Prudential Regulation Authority. The credit supercycle: What next? Asset bubbles or deflation? $tn US GDP 70 US credit market debt European credit market debt Financial crisis 60 Competition & credit control Big Bang (UK) Glass-Steagall Act repealed Quantitative introduced / Bretton Woods easing breaks down 50 Asset bubbles 40 Deflation? 30 You are here 20 10 0 52 54 56 58 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 Source: RBS Credit Strategy, ECB, FRED, Bloomberg 2 Deeper capital markets helped the US restructure debt more quickly US private sector delevered US took losses in capital markets, Europe in banks Debt as % of GDP Default losses since the crisis as % of GDP Cumulative loan losses, including increase in NPLs 7% Cumulative MBS losses 450% Government Household Corporate Bank Cumulative bond losses 400% 6% 350% 5% 300% 4% 250% 1.9% 200% 3% 5.5% 0.3% 150% 2% 100% 2.6% 50% 1% 0% 0.3% Eurozone Eurozone US US 0% US Eurozone 2008 Now 2008 Now Source: RBS Credit Strategy, OECD, Eurostat, ECB, Federal Reserve, Markit Source: RBS Credit Strategy, Moody’s, ECB, Federal Reserve, Fannie Mae, Freddie Mac 3 Public and private debt overhangs still standing Total debt by segment of the economy, % GDP 800% Banks 700% Corporate Household 600% Government 500% 400% 300% 200% 100% 0% IE DK NL PT SE FR UK ES BE EA IT US FI AT GR DE SI Source: RBS Credit Strategy, OECD, Eurostat, ECB, Federal Reserve, Markit 4 Transforming the banking system 5 Bank asset size/ GDP European banks: Largest in the World Source: RBS Credit Strategy, ECB, IMF, RBA, BoJ, US Fed, Fed, B Strategy, BoJ, RBA,US Credit Source: IMF, RBSECB, oE 700% Bank assets % GDP 10-years ago 600% 500% 400% 300% 200% 100% 0% UK US Italy Spain GIIPS Japan Ireland France Austria Cyprus Finland Norway Canada Sweden Slovenia Australia Denmark Germany Euro Area Euro Switzerland Source: RBS Credit Strategy, ECB, IMF, RBA, BoJ, US Fed, BoE Europe’s financial system relies too much on banks Outstanding credit, % of GDP US EA 120% 106% 100% 80% 74% 68% 60% 48% 52% 46% 44% 40% 29% 22% 18% 20% 16% 9% 9% 7% 5% 6% 0% 3% 0% Bank Agency Government Municipal Corp & bank Covered MM MBS ABS loans loans bonds bonds bonds bonds Source: RBS Credit Strategy, ECB, Federal Reserve, SIFMA, BoAML indices, Bloomberg, IMF, FSB 7 Banking systems: Euro area vs US Euro area US 5,557 - Number of banks - 5,783 3.1x - Bank assets/GDP - 0.8x 37 - Number of branches - 35 per 100,000 adults 22% - Bonds/total debt - 52% 16% - Mkt share of top 5 banks - 33% €1,010bn - NPLs - $182bn 10.5% - NPLs/GDP - 1.2% Source: RBS Credit Strategy, Bank of Italy, ECB, IMF, World Bank, FRED 8 More stress after the tests: Many European banks are still weak Results of the ECB-EBA stress tests 44% of banks failed or passed narrowly Austria, UK and Germany have more narrow passes % by number and by total EU banking assets Assets as % of total banking system assets in the country Fail Fail Pass narrowly Pass 20% 100% (3% by total 90% assets) 80% 70% 25 60% 50% 40% Pass 30% 56% 69 29 20% (77% by total assets) Narrow pass 10% 24% 0% (20% by total UK assets) Italy Malta Spain Latvia Ireland France Austria Poland Cyprus Greece Finland Norway Sweden Belgium Portugal Hungary Slovenia Germany Denmark Netherlands Luxembourg Source: RBS Credit Strategy, ECB Source: RBS Credit Strategy, ECB 9 Deleveraging has stabilised, but bank lending is weak Monthly decline in total loans to non-financial corporations between Jan 2009 and Jan 2015, €bn 0 -100 -200 -300 -400 -500 Stabilisation? -600 -580bn -700 2009 2010 2011 2012 2013 2014 Total Source: ECB, RBS Credit Strategy 10 Bank capital is near a 200-year low Book value of equity / total assets for US banks 70% 60% 50% 40% 30% 20% 10% 0% 1834 1844 1854 1864 1874 1884 1894 1904 1914 1924 1934 1944 1954 1964 1974 1984 1994 2004 Source: RBS Credit Strategy, FDIC, Historical Statistics of America 11 Bank asset size/ GDP Too big to fail has not gone away Source: RBS Credit Strategy, Credit company Source: filingsRBSBloomberg, 200% 12 180% 160% 140% 120% 100% 80% 60% 40% 20% 0% CS DB Citi GS MS JPM RZB SEB BES UBS BNP KBC BAC HSBC Danske SocGen Barclays Unicredit Credit Ag Credit ING Bank ING Rabobank Santander Profitability is chronically low RoE for European banks has not fully recovered NIM has been consistently lower for European banks 20% Europe RoE US RoE 5% Europe NIM US NIM 18% 16% 4% 14% 12% 3% 10% 8% 2% 6% 4% 1% 2% 0% 0% 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2001 2003 2005 2007 2009 2011 2013 Source: RBS Credit Strategy, Bloomberg Source: RBS Credit Strategy, Bloomberg 13 Costs are still high Number of branches per 1,000 people, Italy 80 70 60 50 40 30 20 10 0 Museums High schools Secondary Primary Pharmacies Kindergartens Hotels Bank schools schools branches Source: RBS Credit Strategy, OECD, Istat 14 Interconnectedness: Cross-holdings in Europe’s banking system Italy 77.7% Fondo 4.5% 2.57% Strategico 9.42% 100% Qatar Iberdrola Toro Generali 1.3% 0.07% 9.88% 1.4% 12.2% Abu Dhabi Libya Veolia Intesa 6.43% 2.6% 6.44% Monte 5% BlackRock 4.9% 8.7% Groupama Mediobanca UniCredit 0.10% Germany 2.45% France 2.51% 3.4% 2.27% SocGen Credit Agricole Mediolanum 17% Allianz 0.52% 2.28% Portugal AXA 0.52% 0.01% Telecom 0.34% Natixis AM POP 0.1% Deutsche Bank Commerzbank 0.16% BBVA 0.6% 1.21% Caixa Geral 3.65% 0.19% 4.92% 2.8% 5.75% 1.7% Credit 4% 3.15% 0.22% UBS CRH BNP Santander Suisse Caixa Telefonica Holdings 3.26% 6.4% 5.6% 2.81% 1.18% 0.15% 0.14% 34.6% 11.6% Norway Singapore Gas Natural Caixabank Repsol Bankinter State Street Source: RBS Credit Strategy, Bloomberg, company filings. Red = bank, Grey = sovereign, Blue = other 15 Capitalism without capital: The RWA optimisation arbitrage Large banks have optimised risk weights, but absolute capital levels remain low RWA % total 100% 90% 80% 70% 60% BBVA 50% UniCredit Intesa Santander HSBC 40% Rabo ING Lloyds BPCE Barclays BNP 30% CS LBBW ABN Danske Credit Ag 20% UBS Soc Gen Deka Nwide SEB DZ Nordea DB SH Natixis 10% Pohjola 0% 0 200 400 600 800 1,000 1,200 1,400 1,600 1,800 2,000 Balance sheet size, EUR bn Source: RBS Credit Strategy, Bloomberg 16 The economics of a TLTRO loan Example: a local periphery bank 50 Loan yield = 4.5% TLTRO cost = 0.05% 45 40 4.5% default rate, 40% recovery 35 SME loan RWA is 75% (8% capital charge) 30 1,000 loan loan 1,000 € 25 Normal funding Savings Returns on SME 20 cost = 2% = 1.85% lending are still low even w ith Based on a a on Based 15 cheap funding 10 0.5% cost 0.5% return 5 0 Gross interest Normal TLTRO Cost of capital Cost of Operating Net economic income funding costs savings on loans provisions costs profit Source: RBS Credit Strategy 17 Assets: Bad loans still rising in the periphery, stable in core Europe NPL ratios are increasing in Greece, Ireland, Italy, Portugal and Spain Periphery NPL ratios are still rising NPLs remain low in core Europe NPL ratio, % of total loans* NPL ratio, % of total loans 35% 8% UK Greece France Italy 7% Germany 30% Spain Netherlands Portugal 6% 25% Ireland Belgium 5% 20% 4% 15% 3% 10% 2% 5% 1% 0% 0% 07 08 09 10 11 12 13 14 07 08 09 10 11 12 13 14 Source: RBS Credit Strategy, Bloomberg, Banco de Espana Source: RBS Credit Strategy, Bloomberg *The recent decline in Spanish NPLs is partly due to SAREB, which has taken over €50bn of assets off bank balance sheets. For Ireland, we use mortgage arrears/ total loans, which will be lower than total NPL levels 18 Assets: The sovereign-bank nexus is getting stronger Sovereign exposure is a multiple of equity Mid-tier banks have the most periphery sovereign debt Italian, Spanish and Portuguese increase their holdings Bank sovereign holdings at the end of 2013, % total assets Aggregate MFI holdings of sovereigns, % of total assets 18% Spain Portugal Italy Ireland Greece 12% Ireland Spain Italy Portugal Greece 16% 14% 10% 12% 8% 10% 8% 6% 6% 4% 4% 2% 0% 2% BPI UBI BCP Intesa BBVA Monte Bankia Popular 0% Popolare UniCredit Santander CaixaBank Caixa Geral Caixa 2008 2009 2010 2011 2012 2013 2014 Source: RBS Credit Strategy estimates, EBA Source: RBS Credit Strategy, ECB 19 Designing a resilient financial system 20 Capital: 3% is not enough 3% of capital will be insufficient to cover asset losses in a crisis Bank losses in previous crises European banks are generally between 3-4% capital Losses as % of loans and assets Leverage ratio, Q4 2013 20% Losses as % initial loans Losses as % initial assets 6% Leverage ratio 15% 5% 4% 10% 3% 2% 5% 1% 0% 0% CS DB ML BoI AIB UBS ABN BNP KBC B&B SNS UBS NBG Dexia Anglo BBVA Wach Intesa Amag Nrock CMZB Monte Lloyds HBOS WaMu Bankia Nordea SocGen Barclays UniCredit INGBank Rabobank Santander CreditAg Group Source: RBS Credit Strategy, Bloomberg, Company filings Source: RBS Credit Strategy, Company filings.
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